Three different plans for financing a $200,000,000 corporation are under conside

Question

Three different plans for financing a $200,000,000 corporation are under consideration by its organizers. Under each of the following plans, the securities will be issued at their par or face amount, and the income tax rate is at 40%. Plan1 Plan 2 Plan 3 11% bond $100,000,000 Preferred 5% stock, $40 par $100,000,000 $50,000,000 Common stock, $25 par $200,000,000 100,000,000 50,000,000 Determine for each plan the earning per share of common stock, assuming that the income before bond interest and income tax is $30,000,000 then at 16,000,000

Explanation / Answer

_______11% bonds___________________________________… .100,000,000 preferred 5% stock $40par ________________ 100,000,000___. . 50,000,000… common stock, $25par ________200,000,000_100,000,000 _____50,000,000 total _______________________200,000,000 _ 200,000,000_____200,000,000 (1) Plan 1 30,000,000 EBIT - 12,000,000 (30,000,000 x 40%) income tax = 18,000,000 net income ÷ 8,000,000 (200,000,000 / 25) number of common shares = $2.25 EPS Plan 2 30,000,000 EBIT - 12,000,000 (30,000,000 x 40%) income tax = 18,000,000 net income - 5,000,000 (100,000,000 x 5%) preferred dividends = 13,000,000 ÷ 4,000,000 (100,000,000 / 25) number of common shares = $3.25 EPS Plan 3 30,000,000 EBIT -11,000,000 (100,000,000 x 11%) bond interest = 19,000,000 - 7,600,000 (19,000,000 x 40%) income tax = 11,400,000 net income - 2,500,000 (50,000,000 x 5%) preferred dividends = 8,900,000 ÷ 2,000,000 (50,000,000 / 25) number of common shares = $4.45 EPS Do the same thing for the second part of your question using $16,000,000 as your EBIT Source(s): Accounting Fan

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